We all know that real estate investing takes money. What you may not realize, however, is that there are many ways you can get the capital you need to buy that investment property you always wanted. These options include crowdfunding and hard money lending. Well explore both the benefits and drawbacks of both.
What is Crowdfunding?
Crowdfunding is a way to raise money by collecting large or small amounts of money from various people. These people may be family, friends, strangers, local private money lenders, customers or investors. The money is collected via a large pool of people on crowdfunding platforms (such as RealtyeVest) and social media. The private crowdfunding requires
no prototypes, intricate marketing plans or financial institutions to be involved on the part of the investor or sponsor. Instead, you are given a single platform to showcase a business idea or pitch for research. Therein lies it’s appeal and its differentiation from traditional ways of raising capital.
Benefits of Real Estate Crowdfunding
- You reach more potential investors: Depending on the platform used, thousands of investors are available to you. You can also access more than just local private lenders.
- Validation of business concept: You present your business or concept to everyone and receive feedback as well as funds to validate your idea.
- Streamline fundraising efforts: Instead of presenting your ideas to multiple investors at different times, you can have it streamlined which means it is accessible to every potential investor.
- Market fundraising campaign: Crowdfunding allows you to promote the fact you are raising money for your potential investment through all social media channels.
Disadvantages of Crowdfunding
- Trouble finding funding: You have a great idea, but no one is rushing to give you money to support it. You may not receive any money for months or even one year. This can be frustrating and set real estate investment opportunity back.
- Minimum requirement is a must for most crowdfunding: Many crowdfunding companies require a large minimum to participate on their platform.
- Crowdfunding failure: If your crowdfunding campaign falls, it does not disappear from the platform. This means that future crowdfunding ventures may be harder to obtain because of past failures.
- Crowdfunding is for large capital projects: Crowdfunding doesn’t discriminate, but the amount of money you want makes a difference. For smaller raises, the process could be futile.
What is a Hard Money Loan?
A hard money loan is a short-term loan secured by real estate. The loan is funded by one or more private investors, or hard money loan brokers, rather than conventional lenders like banks. These loans are for any type of property such as multi-family, single-family, and commercial property. Depending on the negotiated terms, the loan term could be two to five years. The loan does require monthly payments of interest. The monthly payment could include interest and principal with a one balloon payment at the end of the loan. The amount of the hard money loan depends on the value of the property. The property could property you already owe or the investment property you use as collateral.
Benefits of Hard Money Lending
- Establish a relationship with a hard money broker: A hard money loan broker is more likely to establish a continued working relationship with you when you honor loan terms. This means you can make multiple hard money loans with one lender instead of loans with multiple registered private loan lenders.
- Get your money quickly: You have fewer rules standing between you and your money. Hard money loan brokers are not as interested in the debt you have or your credit score. So, you can obtain the money you need to buy a property faster than working with a tradition bank.
- Barrow a large amount of money: Banks require a five to 20 percent down payment on any loan they approve. Hard money lenders do not. Hard money lenders are willing to lend you about 100 percent of the property’s purchase price. This means you can borrow more money.
- Hard money loans are good for first-time investors: Hard money loans aren’t for every investor or investment property. However, they’re often a great starting point. More than 100 hard money loans exist. If you are new to the investment business, a hard money loan will allow you to borrow more money and use less of your own money.
Disadvantages of Hard Money Loans
- Interest rates are high: Hard money loans typically have an interest rate 10 to 20 percent. This is often higher than a traditional bank loan.
- Short term loans: Bank loans for investment properties can span 15 to 30 years. However, a hard money loan terms are a couple of years.
- Origination fees are higher: Hard money loans are considered a risky investment and investors are going to charge more for the loan. It could be as high as five percent of the total loan.
- Loss of property: If you use the property as collateral and cannot make payments, you may end up losing the property in foreclosure. This means that property goes back to registered private loan lenders.
- Not everyone does 100 percent hard money lending: You must do your homework regarding lenders. Some hard money lenders only work in hard money lending and no other types of loans, and they’ve had hard money broker training. Whereas others do not.
Every investment option comes with both positive and negatives, and both crowdfunding and hard money lending are no exception. The investor willing to take a risk or the one starting out, may be more comfortable with a hard money loan. You receive the money first and must repay later. If you are the type of investor who does not want to pay a loan, crowdfunding is probably your best option because it revolves around securing investors that have private money to lend. Both funding opportunities are a great way to avoid the traditional real estate funding sources such as banks and credit unions. The best option to choose depends on your circumstances, current business needs and real state goals.